11% of sales unnecessarily frozen in the working capital of 150 major Russian companies

MOSCOW, 17 February 2011 ― According to the Ernst & Young survey Resuming Growth: Hidden Reserves, based on officially published financial statements of 150 major Russian companies for the year 2009, Russian companies have been managing their working capital in 2009 less efficiently than in 2008. This resulted in a 23% increase in the total cash-to-cash (С2С) cycle of working capital.

Eighty-six percent of over 800 executives of major international corporations surveyed by Ernst & Young said that since 2008 their companies had revisited their business processes in terms of improving working capital. However, the figures obtained from the analysis of C2C raise doubts as to whether the working capital management programs pursued by companies during the crisis have been efficient and targeted to achieve long-term goals.

In 2009, against a backdrop of an excessive debt burden, scarce sources of refinancing and plummeting purchasing power, companies’ ability to manage cash efficiently almost equaled their ability to survive. Alexander Yerofeyev, Ernst & Young Partner and Head of Restructuring in the CIS, says, "At the moment, when the economy is reviving, the efficient management of working capital plays an important role in the resumption of growth. It is a well-known fact that working capital requirements increase significantly during recovery from a crisis, so the optimization of working capital is still critical."

“Our experience with companies in many industries shows that organizations generally took stringent measures to cut costs and release cash in late 2008 and early 2009 by implementing various working capital improvement procedures. In many instances, however, these measures were short-term and focused on bridging the liquidity gap at a given moment in time, without trying to make the results achieved during the crisis more sustainable,” says Natalia Vasilieva, Ernst & Young Senior Manager, Restructuring.

An analysis of the trends in C2C figures for individual industries demonstrates that the efficiency of working capital management at companies in the natural resources sector, which are often monopolists on the market, fell to a pre-crisis level following a degree of economic recovery. Businesses in other industries, forced to survive in the crisis, were able to improve their business processes and maintain the trends to improve their C2C metrics in 2009.

According to the findings of similar surveys done by Ernst & Young, in 2009 the average annual C2C in Europe and the US was 42 and 38 days, respectively, up 3% and 6% year-on-year. Thus, similar to Russian companies, following a decline in C2C in 2008, European and US companies have almost returned to pre-crisis levels, with slightly improved turnover of receivables .

The C2C cycle of Russian companies (36 days) – shorter than that of European and US companies – is not necessarily proof of greater efficiency in managing working capital. These results have a number of causes – primarily a less representative sampling of Russian companies, because public financial information is not available for smaller Russian businesses. Market leaders also hold stronger negotiating positions, which helps them dictate their terms to counterparties.

The survey demonstrated that if major Russian companies participating in the survey applied best practices of working capital management, they could free up over US $50 billion in cash from their working capital, or up to 11% of their sales for 2009.

Estimates done in the course of the survey illustrate that differences in the efficiency of working capital management demonstrated by leaders and outsiders among major Russian companies are far more significant than that of European and US businesses.

Advantages of efficient working capital management

Ernst & Young professionals believe that improvement of working capital enables the company to release cash which could be used more efficiently in the financial and investment activities. In addition to the increased level of cash, companies may gain significant advantages in terms of improving their business processes, cost cutting, reducing bad and doubtful debt and minimizing obsolete and slow-moving inventory.

Efficient working capital management enhances the management of a company’s business as a whole, improves performance evaluation and management accountability, strengthens the company’s image and credibility with shareholders, counterparties and other stakeholders.

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